Germany, Greece and Spain have cut or plan to reduce their
health spending after European Union policy makers agreed to an
almost $1 trillion rescue fund in May to prevent the fiscal
collapse in Greece from spreading. Germany implemented a price
freeze on drugs through 2013, while Spain introduced a 7.5
percent rebate on most branded products. Greece ordered
drugmakers in May to cut prices by as much as 27 percent.

Annual price cuts of 1 percent to 2 percent on medicines
mandated by European governments have been “commonplace,” Phil Johnson, Eli Lilly & Co.’s vice president of investor relations,
said last month. What’s new is that more countries are demanding
deeper price reductions involving a wider range of products.

“Based on what we’ve seen so far, the pricing erosion in
Europe in 2010 could be the greatest it has ever been,” Tim Anderson, an analyst at Sanford C. Bernstein & Co. in New York
wrote in a July 13 research note.

Industrywide, medicines that generate more than $142
billion in sales will face generic competition in the next five
years, according to IMS Health Inc., providing countries with
more leverage to press for price cuts from drugmakers. If
European economies continue to struggle, pressure will mount on
companies to further cut expenses, said Joshua Schimmer, an
analyst at Leerink Swann & Co. in New York.

‘Bang for Their Buck’

“The industry as a whole needs to be a little bit more
productive with their investments in R&D, and get a little more
bang for their buck,” Schimmer said in a telephone interview.
“It ultimately pushes the pharmaceuticals industry to innovate,
to bring new and better drugs to the market as the old, more
mature ones start to fade off.”

Sanofi-Aventis in 2012 may lose revenue generated by
Plavix, the best-selling blood thinner it markets with Bristol-
Myers Squibb Co. The medicine generated 2.62 billion euros
($3.42 billion) in sales last year for the company, France’s
largest drugmaker. To ensure earnings in 2013 are at least equal
to those in 2008, Chief Executive Officer Chris Viehbacher has
shut or sold plants and canceled the least promising research
projects to try to trim 2 billion euros in costs.

Shrinking Sales Force

Now, pushed by the European price cuts, the Paris-based
company is seeking to further reduce expenses, said Jerome Contamine, Sanofi-Aventis’s chief financial officer, in June. In
the first half of 2010, the company shrank its sales force in
the U.S. by 1,400, and in western Europe by 400, compared with
the first half of 2009.

At the same time, it increased its sales force in emerging-
market countries by 600.

“We are changing our marketing model,” Contamine said at
a Goldman Sachs Group Inc. conference in Los Angeles in June.
“We are merging sales forces, we are reducing sales forces,
having a multiproduct sales force. We will continue to do
that.”

Effect on Merck

Merck, the second-largest U.S. drugmaker, sees the European
measures cutting into revenue by about $300 million in the
second half, Chief Financial Officer Peter Kellogg said last
week on a conference call with analysts. The Whitehouse Station,
New Jersey-based company has sought to control expenses to help
“manage a tighter environment in Europe,” he said.

“We have worked with many of the industry groups and
governments to help develop solutions for our customers to
improve their budget positions and address the short-term
economic issues,” Merck President Kenneth Frazier said on the
call. “While we are taking steps to mitigate the immediate
impact in the EU, we anticipate that the austerity measures will
affect our revenue performance going forward.”

Merck isn’t alone in seeing revenue fallout ahead. Lilly,
based in Indianapolis, projected last month that the European
measures will reduce its revenue by $90 million in 2010 and by
$150 million in 2011. The company, whose top-selling
antipsychotic, Zyprexa, loses patent protection next year, drew
24 percent of its 2009 revenue from Europe, or $5.23 billion.

J&J in Europe

J&J last month estimated the European cuts would reduce
2010 sales by about $200 million, and said it expected the moves
to accelerate through year-end. The New Brunswick, New Jersey-
based company, the world’s largest maker of health products,
derives about a quarter of its revenue from Europe, and has
forecast total 2010 sales of $62.5 billion.

“Some companies will likely be able to absorb these cuts
because of offsets elsewhere,” said Sanford C. Bernstein’s
Anderson. “For others it may in fact cause their guidance to go
lower.”

Pfizer Inc., the world’s largest drugmaker, faces generic
competition next year to its top-seller, the Lipitor cholesterol
pill. The New York-based company got 29 percent of its $50
billion in 2009 sales from Europe. It plans to report second-
quarter financial results tomorrow.

The price cuts, while widespread, affect some areas more
than others, said Leerink’s Schimmer.

‘Most Vulnerable’

“The drugs that are going to be most vulnerable are the
ones that add the least value or are the least innovative,”
Schimmer said. On top of coming patent expirations, price cuts
to older medicines make development of new drugs even more
important, and may drive companies to form more partnerships or
make acquisitions to get access to new products, he said.

Orphan drugs and the companies that make them may become
particularly appealing, as some European countries didn’t
reduces prices as severely on medicines that treat rare
diseases, making them “a good place to hide,” Schimmer and
colleagues said in a May presentation.

That protection may contribute to Sanofi-Aventis’s reported
interest in acquiring Genzyme Corp., the largest maker of
medicines for genetic diseases, Schimmer said.

“Genzyme brings some strategic assets to the board for
Sanofi, or really anyone,” he said. The potential to avoid the
price cuts in Europe “make a company like Genzyme even more
strategic.”